What market characteristics make for a good buy/rehab/sell?

Question

I think that one of the biggest risks with a buy/rehab type of investment, is finding a buyer quickly. Like many would-be investors, I worry that I will end up losing money through holding costs. This scenario worsens when there is hard money involved. Just recently I learned that not all parts of the country are suitable for “flips”. I look at the area that I live in, and can’t help but wonder if I would be making a mistake.

I live in an area that is surrounded by subdivisions, and a sea of HOA’s! The older parts have a mix of very well kept homes and others that are noticeably not as well kept. In the subdivisions, most homes are in the $150k to mid $300k (depending on size and subdivision). Homes outside subdivisions range between $100k and up to six figures (in some areas).

My doubt about the flipping market sets in, when I see some beautiful well kept homes in subdivisions, sit empty for months. Many of these homes are foreclosures, and some actually have reasonable prices for those who are seeking a home to live in.

If such nice homes are not getting sold, then my guess is that flipping an older home will be much more difficult. My only solution would be to buy low/sell low and still make a small profit.

With all this being said, what would be a good flipping market, versus a buy/hold market?

Hattie Dizmond · Answer

@Orlando Paz

This is just my opinion, but here's my perspective...

First, it's necessary to define "market", because there are at least 2 different types of "market" that will impact how a flip will perform for you.

Market - in terms of the overall performance of the RE market for your MLS area.  I'm looking for an overall market health leaning at least slightly towards sellers.  I'm also looking for a nice curve, where the vast majority of existing home sales are in the center 50% of the median home price.  I want median household incomes to be at or above the national average.  And, I'd like to see the majority of the population in the 25 - 45 year old range, because that's the prime house buying range and, and those ages tend to be more mobile.  Finally, population growth projections and job creation numbers.

Market(s) - the specific areas you are targeting, within the larger MLS area.  These should be looked at in terms of sub-markets and micro-markets.  All of data points I identified above apply here.  However, I'm also going to want to refine some of those data points.  Specifically, I want to ensure I'm focusing my acquisition efforts on areas where I can afford to purchase properties.  So, I'm going to take my max acquisition price and divide by .7 (backing into the 70% rule).  Then I'm going to look for areas where the Median price for existing homes is close to that number.

Once I have narrowed the area down to those sub-markets, I want to further narrow my target areas by determining where the highest desirability is.  I use the following criteria to determine desirability...

• rating of elementary school(s) feeding neighborhood(s) using GreatSchools.org
• DOM, the lower the better
• month-over-month & year-over-year pricing trends...I want to make sure prices are increasing
• overall neighborhood quality and services...you're probably going to have to spend time in the neighborhoods to evaluate this one
• proximity to jobs

I get all that together and make sure I can identify at least 3 sub- or micro-markets in order to judge the viability of an area.

Account Closed · Answer

these are not mutually exclusive. good flipping market= plenty of buyers,+ room to make a profit. good rent and hold market= positive cash flow with lots of renters.

Richard Folkerson · Answer

Hi Orlando, I'm just getting into this business same as you and I'm planning on using the fix and flip route as well.  The points Hattie made were super educational for a newbie like myself; as I'm sure you feel the same way.  I haven't been able to focus my ideas as much as her but I have a pretty good idea of what I'm going for.  Here's where I'm at.

I live in the country that is quickly becoming the next 'suburb' of our nations capital - Ottawa.  Up until about 10 years ago from what I've seen growing up in the area is that it was all old family farms and farming communities with 4 or 5 gen of kids sticking around to work on the farm and never moving away.  Now with the average price of a single family home being around 350K$ in the city, young families (with dual government jobs) are looking at making the 40 min commute into the city and are looking more and more into buying properties in my area.  At the same time, my community is flush with the 'old farmers' who no longer farm and are on welfare trying desperately to live out the few remaining years they have in run down homes they haven't been able to maintain for years.

I'm still working out the details of my business plan, and alot depends on the right piece of property coming up but I figure I can probably get something for under 100K$ that only needs esthetic remodeling i.e. new floors, coat of paint, siding and perhaps bathroom fixtures that would only put me into it for 15K$ at the very most.  In my opinion the houses for sale in my area are WAY over priced because of the high demand of 'newcomers' and sentimental attachment people have for their homes.  I could turn that 'under 120K$' (after renos) property into a easily sellable 190 000$ and still be 10K under the average asking price of the area.

I'll let you guys know how it all works out.

Dell Epps · Answer

Hey Orlando. They quality of a market will vary from town to town, city to city, state to state. I agree with @Hattie on the differentiation of "markets". This is also good info for me since I also interested in fix & flips.

I think the best course of action is to network with a real estate agent who can give you much more detailed info an area that might be good to fix a house and sell it in, especially if you're thinking about flipping in an area outside of your local area. At least that's what I'm planning to do; working with 2 local agents at the moment, and plan to expand to Cali where a friend lives to partner with him in the future.

Orlando Paz · Answer

@Hattie Dizmond- I appreciate the well thought out response. I've been thinking about doing a few rehabs, in order to build the funds needed to start in other areas of RE investing. Just recently, it was brought to my attention that not all areas are suitable for flips. So now I find myself questioning this initial strategy. My only option right now is hard money, so that just adds to the stress! :) I need to educate myself further, and make some careful choices.

What market characteristics make for a good buy/rehab/sell?

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